Construction sector should brighten in 2008

BUSRIN TREERAPONGPICHIT and KRISSANA PARNSOONTHORN

Steelmakers’ stocks have outperformed the market thanks to soaring prices.

The construction materials sector, ranked 18th in total shareholder return (TSR) last year because of stagnant demand, has shown some life in 2008.

The average capitalisation for the sector at the end of last year was 410.63 billion baht, and its TSR was 11.29%, compared with 3.50% on a three-year basis, 17.16% over five years and 27.59% over 10 years.

Sukit Udomsirikul, assistant managing director for business development at Siam City Securities, said the industry's performance was not that disappointing, despite the fact that last year was one of the worst since 1997.

In 2007, overall returns for the sector were unpredictable due to volatile share prices for small-cap stocks, mostly newly listed companies.

The top performer was Rich Asia Steel (RICH), which makes industrial components for automobile assembly. The company has 5.7 billion baht in capitalisation, and a one-year return of 490.73%. But the high rates of return were a result of its volatile stock prices.

"I would say that I never monitor this stock because its prices have swung sharply since it listed in 2006 without any reason supporting that trade," said one analyst who declined to be named.

Rich's stock was monitored by regulators as it showed unusual trading patterns and price volatility, even though there was no change in its fundamentals.

The second-ranked company in the sector was an investment by the founder of Sino-Thai Engineering Construction Co, STP & I Plc (STPI), which was also being investigated by regulators for trading irregularities last year.

Capitalised at 2.21 billion baht, it yielded 128.6% for a one-year TSR, 74.33% for three years, 32.33% for five years, and 29.67% for 10 years.

STPI reported a net loss of 6.59 million baht in 2007 against a net profit of 244.91 million in 2006. Analysts do not monitor this stock as it is so volatile.

However, steelmakers' stocks had outperformed the market since last year, reflecting the continual rise in steel prices.

Several brokerage houses pick Tata Steel (Thailand) Plc (TSTH) as the strongest stock in this group, due mainly to its low raw-material costs.

TSTH ranked fourth in the sector, with 14.24 billion baht in capitalisation. The one-year return was 62.28%, three-year return -2.60% and the five-year TSR was 16.19%.

Mr Sukit believed all steel firms' operating results would continue to grow in the first half of this year, on expected rises in steel prices, despite the fact that demand has not increased significantly.

He also noted that steel hoarding in anticipation of climbing prices had been occurring since September last year.

"It is forecast that global steel prices will decline in the third quarter because prices have been volatile for a long time, which is an abnormal situation," he said.

The sector's largest company and Thailand's biggest industrial conglomerate, Siam Cement Plc (SCC), failed to attract short-term investors looking for capital gains, but could be lucrative for long-term investors expecting dividends. SCC delivered a 1.94% TSR for one year, 5.11% over three years, 21.19% for five years 29.16% for 10-years.

Mr Sukit said consumption of construction materials had shrunk in line with the property market, and the delay of megaprojects. He forecast that in 2008, the market would improve slightly as a result of stronger domestic demand. Threats would be ongoing high oil and transport costs. As well, he said megaprojects would likely be delayed as the political situation remains in flux.

Mr Sukit picks the ceramics industry as the most attractive sector, even though it earned slightly below-average returns in 2007. He expected the sector would be fuelled by low-income residential projects, as farmers would have higher purchasing power in line with a strong increase in farm product prices.

He recommends Dynasty Ceramic Plc -  80% of its output is mass-market products -  with a capitalisation of 6.3 billion baht. It had a TSR for one year of 28.01%, 6.70% for three years and 18.30% for five years.

"We believe ceramics companies' returns will be markedly better than other industries in the construction material sector this year, as we have already rated it as an overweight sector," he said.